Dividendsanity and the Summer Surprise

Michael A. Gayed, CFA, winner of the 2014 Dow Award, is chief investment strategist and co-portfolio
manager at
Pension Partners, LLC., an
investment advisor which manages mutual funds and separate accounts according
to its ATAC (Accelerated Time and Capital) strategies focused on inflation
rotation. Prior to this role,
Gayed served as a portfolio manager for a large international investment group,
trading long/short investment ideas in an effort to capture excess returns. From
2004 to 2008, Gayed was a strategist at AmeriCap Advisers LLC, a registered
investment advisory firm that managed equity portfolios for large institutional
clients. In 2007, he launched his own long/short hedge fund,
using various trading strategies focused on taking advantage of stock market
anomalies. Follow him on Twitter @pensionpartners and YouTube
youtube.com/pensionpartners.

In my last article titled "Dividendsanity and the negative narrative", I re-emphasized the idea that the negative narrative has caused various intermarket relationships to hit levels not seen since post-Lehman, and that behaviorally markets have acted as if we are already in a deep recession/depression or experienced a Crash similar to the Summer Crash of 2011.

I noted that the Utilities sector
XLU, +0.21%
has a forward price-to-earnings ratio that is higher than Technology
XLK, +0.62%
which indicates that "the love for dividends and love for the bear trade is in many ways a form of insanity when growth expectations are so disconnected because of the negative narrative."

This is illogical when we are not in a recession in the U.S. based on current data, and when we are not in a 2008-like environment. The "end of the world trade" has sent global bond yields to levels as if we are headed for 100% certainty towards a global deflationary spiral, and has sent dividend sectors to be bid up to unreasonable levels. I will be on CNBC today, Monday, sometime between 2-3 PM EST discussing this idea further.

Take a look below at the Price to Earnings ratios of market sectors below.

Here we are with equity prices still strongly up for the year, sentiment towards equities at bearish levels, and continued rhetoric by media pundits that say "we love dividend stocks," and the market has as a result overpriced the trade of fear by making the Consumer Staples
XLP, +0.69%
Healthcare
XLV, +0.47%
and Utilities (XLU) areas the most richly valued of all sectors. Meanwhile, Industrials
XLI, +0.70%
Financials
XLF, +0.94%
and Energy
XLE, +0.24%
from a pure valuation standpoint are among the "cheapest" in the face of a world that is still spinning, and with continued paranoia by SuperBen and the League of Extraordinary Bankers to prevent a 2008 repeat.

Dividendsanity further proves that the most one sided trade is the trade of fear. From a contrarian standpoint then, if the negative narrative is wrong and we have all overestimated the odds of a collapse in global economies in the here and how, then the Summer Surprise means reflation persists, and an end to the end of the world trade pushes equities to higher highs. It also means that Dividendsanity reverses as money flows out of defensive/income sectors, and positions more into aggressive/growth sectors. Income has becomes very expensive, while growth has become very cheap, meaning that one should consider liking "everything but" dividend stocks as I mentioned on CNBC Asia last week.

Despite continued blows and every reason in the world for stocks to collapse, equities are still standing, and growth sectors like Technology are themselves initiating dividends, buying back shares, and still growing. In the context of this, whenever you hear people say markets "fear uncertainty," you should immediately stop and then ask yourself: should there not be uncertainty in the fear trade and negative narrative playing out as well?

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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